Foreign banks exposure to China port fraud may top $500 million

EndaCurran

DanielInman

IraIosebashvili

Foreign banks at risk to a possible fraud at a Chinese port are tallying up their exposure as they prepare their quarterly earnings reports, with estimates topping $500 million.

Industry executives believe Chinese banks could be on the hook for more, with estimates running into the billions of dollars if the loans backed by the fraudulent use of Qingdao-based metals as collateral go bad.

The sum highlights the potentially sizable losses that some banks would face if Chinese traders that fraudulently use the same copper and aluminum as collateral to obtain loans default on the commodity-backed loans. Chinese authorities are currently investigating whether the same stockpile of metals was used to secure multiple loans. Western banks, meanwhile, have been shut out of warehouses in both Qingdao and Penglai, both in Shandong province, and are struggling to gauge how much of the metals-backed loans they have made have been fraudulent and could be at risk of default.

The estimates for exposures covers all of the warehouses at Qingdao port, but so far the probe has focused on Dagang, a smaller unit at the port. The worry for bankers is that the potential fraud may be found to be more widespread at Qingdao or elsewhere according to banking executives familiar with the matter.

Standard Chartered Bank
STAN, +0.49%
disclosed a $250 million exposure to Qingdao last week, though Chief Executive Peter Sands told reporters at that time that the amount isn’t “material at this stage” and is “across multiple clients, multiple exposures and multiple facilities.”

Other foreign banks that have exposure to Qingdao are Dutch bank ABN Amro Bank NV, French banks BNP Paribas SA
BNP, +1.17%
and Natixis
KN, +0.68%
, South Africa’s Standard Bank PLC
SBK, -1.22%
, and U.S. bank Citigroup
C, -0.34%
, people familiar with the matter said. Apart from Standard Chartered, lenders including Citigroup and Standard Bank have previously acknowledged potential problems with commodity financing in China but have given no further details.

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